Oil tops $90, 10-year yield above 4.6%, and consumers lose $1,100 average as savings rate drops to 3%. Economists warn of recession risk if oil stays elevated. Fed likely holds rates next week.
The U.S. completed its 10th straight night of strikes against Iran on Monday, after the Houthis in Yemen declared a maritime embargo against Saudi Arabia. A third service member died in the recent fighting. President Donald Trump vowed retaliation, saying on Truth Social "they will pay."
The S&P 500 fell only marginally, staying within 2% of its all-time high set in June. Investors have largely brushed off the escalation. They have focused on corporate earnings and softer inflation data. Oil prices reacted. Brent crude briefly topped $90 a barrel on Monday and hovered just below that level Tuesday. The U.S. 10-year Treasury yield traded above 4.6% on Monday, a level traders watch. It remained near that mark Tuesday.
"If we're above $85 or $90 into the end of the year, I suspect that the earnings estimates for this year would have to be trimmed," said Art Hogan, chief market strategist at B. Riley Wealth. Hogan said the S&P 500 could fall into a correction in a worst-case scenario. He noted that tech, the S&P 500's largest sector at 38% weighting, is relatively insulated from higher energy prices. Energy accounts for just 3% of the index.
Financials and healthcare could also benefit from secular trends, regardless of oil. The energy sector and logistics companies that rely on fuel are likely to be the biggest laggards. Ryanair said Monday its weak first-quarter profits reflected delayed bookings because of the Middle East crisis.
Mislav Matejka, strategist at JPMorgan Chase & Co. (Alpha Score 64, Moderate), said he is sticking to the playbook of using the rising conflict to add to dips. "We continue to believe that investors should use the dips driven by geopolitical headlines to add exposure," Matejka wrote earlier this month. "We believe the market has become increasingly adept at pricing geopolitical risk as transitory."
Economists worry about what rising oil prices mean for consumers. Mark Zandi, chief economist at Moody's Analytics, said the average American household has lost around $1,100 from the war so far, including higher energy costs and military expenses. Real disposable income has been negative or flat on an annual basis in recent months, a pattern typically seen during recessions, Zandi said.
Consumers have turned to savings to prop up spending. The personal saving rate came in at 3% in May, down nearly 2 percentage points from a year earlier, according to the Bureau of Economic Analysis. Zandi warned that rainy-day funds are dwindling.
Gasoline prices rose to $4 a gallon on Monday for the first time in more than a month, according to AAA. Economists expect a resurgence of oil to put upward pressure on the consumer price index. May's 12-month CPI reading was at its highest in three years before pulling back last month as energy costs eased.
Luke Tilley, chief economist at M&T Bank Corporation (Alpha Score 69, Moderate) and Wilmington Trust, said the Fed will watch whether higher gasoline prices bleed into core inflation. "The key for the Fed, as all of them have said out loud, is: Is it going to bleed through to core inflation?" Tilley said. Fed funds futures show an 83% likelihood the central bank holds rates steady at its meeting next week, according to CME Group Inc. (Alpha Score 59, Moderate) FedWatch tool.
Companies with value-focused or driving-dependent consumer bases could see their clientele become more selective if oil prices stay elevated, said Michael Gunther, analyst at Consumer Edge. That could hurt businesses ranging from Dollar General to Tractor Supply. On the other hand, warehouse clubs such as Costco and Sam's Club could win market share as drivers hunt for value. Costco reported "record-breaking volumes" for gas at the end of its third fiscal quarter after the war sent pump prices higher.
"Consumers are paying attention," Gunther said. "And they are shifting their habits to manage their wallet."
Retail sales showed consumers continued spending, there were idiosyncratic boosts like event tickets and gambling with the World Cup, Gunther said. Heather Long, chief economist at Navy Federal Credit Union, said consumers had padding from larger tax returns under President Donald Trump's tax cuts. Long said they likely won't have similar tailwinds if faced with rising energy prices in the back half of the year.
"The cushion is deflating," Long said. "There's no other obvious air pump coming."
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